the The situation at WeWork has investors in a frenzy, realtors are in a jam and the entire commercial real estate industry is on its knees. But to more than 700,000 WeWork “Members” who work in many co-working spaces, the future of the company is a particularly urgent question.
WeWork warned investors last week of its losses raise “great suspicion” In her ability to keep the company afloat and listed Bankruptcy as a possible option. In the first six months of 2023, the company posted a net loss of $700 million. While that’s a 40% drop from its losses at the same time last year, it may not be enough to address WeWork’s growing liabilities, including $13.3 billion in long-term lease obligations and $2.9 billion in long-term debt.
The company has a plan that includes renegotiating leases, selling assets, and building an app to better serve its customers, according to CEO David Tooley. WeWork has been in trouble for some time now — in part because the pandemic has changed the way people work — and the company has already largely explored options that don’t qualify as bankruptcy, said Stephen Starr, a bankruptcy attorney at New York-based Starr. & Star. Apply to US Bankruptcy Court It may be in WeWork’s near future.
If that happens, what happens to all the workers at her sites? It depends on who you are.
WeWork does not own any of its offices. Rent is paid to landlords. And WeWork members pay to use the facilities and amenities, with contracts that are more like gym memberships than leases. Starr said this means WeWork members are not given the same rights as tenants or sub-tenants in the event of bankruptcy. luck.
If WeWork files for bankruptcy, members are not automatically evicted from their offices. But they could be evicted from their premises if WeWork cancels the lease agreements it has with landlords, which is allowed under US bankruptcy law. Depending on the specifics of their contracts and local law, they may not get their money back, bankruptcy and real estate experts say.
WeWork members can be left at the mercy of landlords
Chapter 11 bankruptcy allows management to stay where it is and reorganize the company without the weight of previous payments due. With it comes WeWork’s right to assign building leases without repercussions. If that happens, the company would likely look at income per building in every city, keep the items that make money and break leases for those that don’t, Starr said. Landlords will end up in the last category on the list of parties WeWork owes money to, and they may never get paid — the company already owes money to a lot of people, and it only has so many assets it can sell to get the cash.
WeWork has closed down locations in the past and, in those cases, moved members to other nearby buildings it rented. Depending on how the current situation at WeWork is going, this may not be an option.
If WeWork abandons a building, members may be able to switch their office locations to new buildings. If the building were closed entirely and disposed of all its premises and leases, its occupants would be left at the mercy of the building owner. Since residents are not covered by eviction laws, which are for real tenants, it is unclear how long they will have to vacate.
Albert Sultan, vice president at Kassin Sabbagh Realty, a commercial real estate firm, said the owners may be willing to negotiate with members who worked there. But, Sultan said, this is more likely to happen with large companies that take up a lot of space than with smaller organisations. If the owner has it fortune 500 company in their space, they will make a direct deal with the tenant,” he said. Amazon, for example, uses WeWork, and this is a company that realtors are happy to host. For smaller businesses or individual workers with WeWork memberships, Sultan said, short-term rental deals will likely be done on a case-by-case basis. luck. WeWork rents from a variety of landlords, all with different resources. And creating co-working spaces isn’t the business they’re in.
WeWork can also terminate its agreement with members if it files for bankruptcy. If members pay any company deposits early, they will then join the group of creditors to whom WeWork owes money. Starr said their ability to recover their deposits could depend on the wording in their contracts and the laws in their individual states. In the case of Knotel, a smaller co-working space company that filed for bankruptcy in 2021, customers served were deemed unsecured claims, meaning debts were added to the long list of owed parties. Future payment was uncertain.
While breaking members’ contracts is possible, WeWork might avoid taking such a step if its plan were to eventually emerge from the bankruptcy process. WeWork has the choice between Chapter 11 and Chapter 7. The former allows the company to restructure and continue operations, while the latter effectively shuts down the company.
A WeWork spokesperson said in an emailed statement luck.
Of course, growing concern about WeWork’s business could prompt members and landlords to cut ties with the company, fueling a vicious cycle hurting WeWork’s balance sheet.
Scary ripple effects for everyone
Given how much each party holds, a restructuring deal — whether imposed by a bankruptcy judge or negotiated through some other process — is likely to offer the best outcome of all.
“WeWork has landlords in a very precarious situation,” Sultan said. By the nature of corporate leases, WeWork holds an important place in these buildings and pays a significant portion of the rent. Landlords face the same issues with in-office work that WeWork does, so building owners may be better off renegotiating terms with WeWork rather than trying to find new tenants.
The cascading effects of a large tenant such as termination of WeWork leases collectively It could also add pain to the commercial real estate industry, Sultan said, driving down rents for years to come luck. In cities like New York, WeWork has a massive footprint but the return to the office has been slow. Demand for office space is low, so if landlords lose WeWork, they’ll have to lower their prices to compete with each other. Over time, he said, that low price becomes the norm.
And if landlords aren’t willing to offer short-term rentals or co-working spaces to orphaned WeWork members, the aggrieved members may have a case in court. Starr, the bankruptcy attorney, said that while their agreements with WeWork are not called leases, they could argue that the content of the contract makes them leases, regardless of the name. In other words, if it walks like a duck and talks like a duck, it’s a duck. Winning this argument in court would allow the companies or individuals involved landlord rights, which could include residency in their building. But the details of their stay, including the length of time and who the tenants pay, are unclear.
This story originally appeared on Fortune.com
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